AAR CORP. Form 10-Q Summary
Business context and reporting period
AAR CORP. is an aviation aftermarket and government-services company operating through Parts Supply, Repair & Engineering, Integrated Solutions, and Expeditionary Services. This unaudited Form 10-Q covers the three and six months ended November 30, 2023, representing the second quarter and first six months of fiscal 2024. Prior-period segment results were recast to reflect the new segment structure.
Key financial metrics
| Metric | Three months ended Nov. 30, 2023 | Year-over-year change | Six months ended Nov. 30, 2023 | Year-over-year change |
|---|---|---|---|---|
| Sales | $545.4 million | 16.1% increase | $1,095.1 million | 19.5% increase |
| Gross profit | $103.4 million | 20.5% increase | $204.7 million | 22.1% increase |
| Gross margin | 19.0% | Up from 18.3% | 18.7% | Up from 18.3% |
| Operating income | $38.3 million | 18.2% increase | $63.6 million | Flat |
| Net income | $23.8 million | Up from $22.5 million | $23.2 million | Down from $45.2 million |
| Diluted EPS | $0.67 | Up from $0.64 | $0.65 | Down from $1.27 |
- Second-quarter operating margin was approximately 7.0%; six-month operating margin was approximately 5.8%. Net margin was approximately 4.4% for the quarter and 2.1% year to date.
- Commercial sales increased 23.5% in the quarter and 28.5% for the six-month period, driven principally by Parts Supply demand for new parts and used serviceable material.
- Government and defense sales increased 1.4% in the quarter and 2.2% year to date, while related gross margins declined to 15.4% and 15.9%, respectively, due primarily to product and service mix.
- Six-month operating results included a $26.7 million non-cash pension settlement charge and an $11.2 million charge related to an adverse Russian court judgment.
- Cash and cash equivalents were $65.1 million at November 30, 2023, compared with $68.4 million at May 31, 2023. Working capital was $814.3 million.
- Net cash used in operating activities was $1.3 million for the six months, including $1.1 million from continuing operations, versus $39.3 million used in the prior-year period.
- Capital expenditures and other investing uses were $20.3 million. Financing activities provided $15.3 million, primarily from $5.0 million of net revolver borrowings and $10.3 million of stock-compensation activity.
- Long-term debt was $275.0 million, consisting of $277.0 million drawn under the revolving credit facility, net of debt issuance costs. Approximately $332.0 million of revolver capacity remained after borrowings and letters of credit.
- The company had $12.6 million of receivables sold under its $150 million receivables purchase agreement, leaving stated availability of $137.4 million.
Material changes versus the prior comparable period
- Parts Supply quarterly sales rose 24.0% and operating income rose 33.3%; its operating margin increased to 12.5% from 11.6%. Six-month sales rose 31.9%, but operating margin declined to 9.4% from 11.2% because of the Russian judgment charge.
- Repair & Engineering quarterly sales increased 7.9% and operating income increased 31.4%, with margin improving to 7.8% from 6.4%. Six-month margin improved to 7.2% from 6.1%.
- Integrated Solutions sales grew 23.0% in the quarter and 22.7% year to date, aided by the Trax acquisition, but operating income declined 9.9% in the quarter and 8.4% year to date. Margin fell to 4.1% and 4.5%, respectively, partly because cumulative catch-up adjustments were less favorable.
- Expeditionary Services sales declined 34.4% in the quarter and 24.8% year to date; operating margin fell to 5.7% and 6.3%, respectively, primarily because of lower pallet, container, and shelter volumes.
- Selling, general and administrative expense increased 24.4% in the quarter and 36.4% year to date, reflecting growth investments, Trax amortization and acquisition costs, and the Russian judgment charge.
- Interest expense increased to $6.2 million in the quarter and $12.0 million year to date, reflecting higher borrowings and rates. The average borrowing rate was 6.7% in the quarter and 6.6% year to date, compared with 4.1% and 3.4%, respectively, in the prior periods.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects long-term strength in aviation products and services, supported by commercial aftermarket trends and continued investment in government-market opportunities. The filing does not provide specific earnings or revenue guidance.
- Remaining performance obligations, or firm backlog, were approximately $720 million at November 30, 2023. Approximately 55% was expected to be recognized within 12 months.
- On December 21, 2023, AAR agreed to acquire Triumph Group’s Product Support business for $725 million in cash. The transaction is expected to close in the first quarter of calendar 2024, subject to customary conditions and regulatory approvals, and is expected to be funded with new equity and debt financing.
- AAR recorded a total $13.0 million liability related to the Russian bankruptcy litigation. The company is appealing the judgment and states that sanctions and other restrictions may limit its ability to satisfy or settle the judgment.
- A customer has asserted at least $32 million of damages under an uncapped performance guarantee retained in connection with the sale of AAR’s Composites business. AAR disputes the claim, but states that a loss is reasonably possible and that the range of loss cannot currently be estimated.
- A significant regional airline customer had delayed payments. Accounts receivable of $11.9 million and contract assets of $9.4 million were associated with that customer, including $5.4 million of past-due receivables. Management expected full payment and had not recorded a credit-loss reserve, but acknowledged potential future loss risk.
- AAR recognized a $2.0 million reduction in remaining loss reserves after amending a component-repair agreement. Remaining reserves were $3.1 million at November 30, 2023.
- AAR self-reported potential Foreign Corrupt Practices Act and other compliance violations involving Nepal and South Africa. Government reviews remain ongoing, and the filing states that potential actions cannot currently be predicted.
- The company was in compliance with its financing covenants, and management concluded that disclosure controls were effective as of November 30, 2023.
Most important facts for investors to verify
- Completion, financing, regulatory approval, purchase accounting, and integration risks associated with the planned $725 million Triumph Product Support acquisition.
- Cash conversion and working-capital requirements, particularly the $71.5 million increase in inventories and the near break-even operating cash flow for the first six months.
- Interest-rate exposure, leverage, revolver availability, and compliance with financing covenants after any acquisition-related borrowings.
- Resolution and enforceability of the $13.0 million Russian judgment, including sanctions-related constraints.
- Potential exposure under the uncapped A220 performance guarantee and the customer’s asserted damages of at least $32 million.
- Credit quality and collection status of the significant regional airline customer.
- Sustainability of commercial demand, government-program margins, and the lower profitability trend in Integrated Solutions and Expeditionary Services.