AAR CORP. Form 10-Q Summary
Business Context and Reporting Period
AAR CORP. reported unaudited results for the quarter and six months ended November 30, 2012, the second quarter of fiscal 2013. The company operates through two recast segments: Aviation Services and Technology Products. Prior-period segment information was recast to conform to the new presentation.
Key Financial Metrics
| Metric | Three Months Ended Nov. 30, 2012 | Prior Year | Six Months Ended Nov. 30, 2012 | Prior Year |
|---|---|---|---|---|
| Sales | $512.8 million | $482.0 million | $1,063.3 million | $967.5 million |
| Operating income | $37.8 million | $34.3 million | $76.2 million | $67.1 million |
| Net income attributable to AAR | $17.8 million | $17.6 million | $36.0 million | $34.2 million |
| Diluted EPS | $0.44 | $0.43 | $0.89 | $0.83 |
| Operating margin | 7.4% | 7.1% | 7.2% | 6.9% |
Six-month gross profit was $177.7 million, compared with $154.3 million in the prior year. Segment gross margins were 17.2% for Aviation Services and 16.4% for Technology Products in the quarter, compared with 17.0% and 13.8%, respectively, in the prior year. The six-month margins were 16.3% and 17.8%, compared with 16.4% and 14.1%.
Six-month operating cash flow was $60.3 million, compared with $4.8 million in the prior year. Investing activities used $24.8 million, including $19.1 million of capital expenditures and a $16.5 million final payment for the Telair and Nordisk acquisition. Financing activities used $35.3 million, primarily reflecting net debt repayments, dividends, and share repurchases. Cash increased to $69.2 million from $67.7 million at May 31, 2012.
Working capital was $627.1 million. Total debt was $778.9 million, including $106.6 million of current maturities and $672.3 million of long-term debt. The company had $300.0 million outstanding under its $580.0 million unsecured revolving facility, with approximately $25.5 million of letters of credit, leaving approximately $254.5 million available. A separate secured facility had $29.3 million outstanding and $35.7 million available. Management stated that all financial covenants were satisfied.
Material Changes Versus the Prior Comparable Period
- Sales increased 6.4% in the quarter and 9.9% for the six-month period.
- Commercial-customer sales increased 28.3% in the quarter and 26.5% year to date, primarily due to the acquired Telair and Nordisk businesses and organic growth in maintenance, parts supply, and engineering services.
- Government and defense sales declined 15.4% in the quarter and 7.3% year to date because of lower logistics-program activity and reduced mobility-products volumes, partly offset by stronger Airlift sales.
- Technology Products benefited from Telair and Nordisk, which contributed $57.5 million of quarterly revenue and $114.3 million of six-month revenue. Mobility-product sales declined due to completion of a large contract and weaker demand.
- Interest expense increased by $3.0 million in the quarter and $5.8 million year to date, primarily because of the $175.0 million of 7.25% senior notes issued in January 2012 to fund acquisitions.
- Net income increased only modestly despite higher sales and operating income because of increased interest expense and higher selling, general and administrative costs.
- The company repurchased approximately $8.5 million of treasury stock during the six-month period and paid $7.1 million of dividends.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide explicit quantitative earnings or revenue guidance. Management emphasized continued pressure on defense spending under the Budget Control Act and the potential for sequestration, scheduled at the time for January 2, 2013, to reduce Department of Defense spending and adversely affect demand.
A significant contingency involves the Airbus A400M cargo-loading-system program. AAR had capitalized $105.5 million of related development costs at November 30, 2012 and expected program revenue of more than $300 million based on then-current projections. AAR was negotiating contract modifications with Airbus amid disputes that could reduce its role and expected revenue. Failure to reach agreement could result in arbitration and the possible impairment or loss of recovery of some or all of the capitalized development costs.
Accounts receivable included $31.0 million of unbilled amounts related to the KC-10 supply agreement, while other assets included $30.6 million of costs in excess of amounts billed. Recovery depends on future customer billings and program execution.
The company completed goodwill impairment testing after changing its segment structure and concluded that no impairment was indicated. The filing also notes foreign-exchange exposure, with a hypothetical 10% U.S. dollar devaluation against foreign currencies estimated to reduce earnings by approximately $2 million. Interest-rate exposure arises from variable-rate debt; the company uses an interest-rate swap and cap as cash-flow hedges.
On December 20, 2012, after the reporting date, AAR commenced an exchange offer to register its outstanding 7.25% senior notes due 2022. The filing states that disclosure controls and procedures were effective as of November 30, 2012, with no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether defense-budget reductions or sequestration materially affect logistics, mobility-products, and other government contracts.
- The outcome of negotiations or potential arbitration with Airbus and the recoverability of the $105.5 million in A400M capitalized development costs.
- Collection and billing timing for the KC-10 unbilled receivables and costs in excess of billings.
- Integration, performance, and margin sustainability of the Telair and Nordisk acquisitions.
- Debt maturities, variable-rate exposure, covenant compliance, and availability under revolving credit facilities.
- Whether improved operating cash flow is sustained after considering inventory, program costs, capital expenditures, dividends, and share repurchases.
- Aircraft portfolio dispositions by joint ventures, including the planned sale of ten aircraft leased to Malaysia Airlines.