AAR CORP. 10-K Summary: Fiscal Year Ended May 31, 2010
Business Context and Reporting Period
This Form 10-K covers the fiscal year ended May 31, 2010. AAR CORP. is a diversified provider of products and services to the worldwide aviation and government/defense markets. The company operates through four segments: Aviation Supply Chain, Government and Defense Services, Maintenance, Repair and Overhaul (MRO), and Structures and Systems. A significant development during the period was the acquisition of Aviation Worldwide Services (AWS) on April 7, 2010, for approximately $200 million, which led to the creation of the new Government and Defense Services reportable segment.
Key Financial Metrics
| Metric | Fiscal 2010 | Fiscal 2009 |
|---|---|---|
| Sales | $1,352,151 | $1,423,976 |
| Gross Profit | $243,519 | $241,615 |
| Operating Income | $90,332 | $102,892 |
| Net Income (Attributable to AAR) | $44,628 | $56,772 |
| Diluted EPS | $1.16 | $1.45 |
| Cash from Operations | $153,156 | $64,451 |
| Total Debt (Recourse + Non-Recourse) | $428,454 | $383,200 |
| Working Capital | $537,879 | $596,894 |
| Cash and Equivalents | $79,370 | $112,505 |
Note: All figures in thousands except per share data.
Material Changes vs. Prior Period
- Revenue Decline: Consolidated sales decreased 5.0% to $1.35 billion. Commercial sales dropped 13.5% due to reduced airline capacity and inventory levels, while defense sales increased 6.1% driven by the AWS acquisition and specialized mobility products.
- Profitability Pressure: Operating income fell 12.2% to $90.3 million. The Aviation Supply Chain segment saw a 16.3% drop in gross profit due to lower volume and pricing pressure. The MRO segment gross profit declined 25.5% due to fewer maintenance visits.
- Segment Performance: The Structures and Systems segment was a bright spot, with sales up 4.0% and gross profit up 39.0% due to favorable product mix and cost reductions. The Government and Defense Services segment sales increased 11.8% primarily due to AWS.
- Impairments: Unlike fiscal 2009, which included $31.1 million in impairment charges for aircraft and inventory, fiscal 2010 had no such charges.
- Debt Structure: Total recourse debt increased to $415.9 million (from $353.0 million) largely due to new borrowings ($63.5 million) used to finance the AWS acquisition.
Guidance, Outlook, and Risks
Fiscal 2011 Outlook: Management expects sales between $1.5 billion and $1.6 billion and diluted earnings per share of $1.25 to $1.40. This outlook assumes improving commercial markets and full-year impact from AWS, offset by lower sales in Structures and Systems due to sales mix changes.
Key Risks and Contingencies:
- Customer Concentration: Sales to the U.S. Department of Defense and contractors represented 44.9% of total sales. Future levels depend on government funding and deployment strategies.
- Mesa Air Bankruptcy: Significant customer Mesa Air Group filed for Chapter 11 bankruptcy in January 2010. AAR wrote off pre-petition receivables and holds $38.6 million in long-term assets supporting Mesa programs. Future sales to Mesa are expected to drop to $30-35 million annually.
- A400M Program: AAR has capitalized approximately $48.8 million in development costs for the A400M cargo system. Delays in the program (first shipments slipped to fiscal 2013) pose a risk to cost recovery.
- Export Compliance: Following the AWS acquisition, AAR expects to enter a consent agreement with the U.S. Department of State regarding prior export control violations by AWS. Failure to comply could result in debarment from government contracts.
- Aviation Industry Cyclicality: The company remains exposed to economic downturns, high oil prices, and airline bankruptcies which reduce demand for parts and maintenance.
Investor Verification Checklist
- AWS Integration: Verify the actual revenue contribution and margin profile of the AWS acquisition in the first full fiscal year (2011) against the pro forma guidance.
- Mesa Exposure: Monitor the status of Mesa Air Group's bankruptcy restructuring and the collectability of the $6.2 million in post-petition receivables and the $38.6 million in leased equipment.
- A400M Timeline: Track Airbus's delivery schedule for the A400M to assess the risk of further delays impacting the recovery of capitalized development costs.
- Commercial Recovery: Assess whether the projected recovery in commercial airline capacity and inventory spending materializes to support the $1.5B-$1.6B sales guidance.
- Export Compliance: Confirm the terms of the consent agreement with the Department of State and ensure no sanctions are imposed that would restrict government contracting.