AAR CORP. Form 10-Q Summary
Reporting period: Quarter and six months ended November 30, 2017; fiscal 2018 second quarter. The filing is unaudited and covers continuing operations unless otherwise noted. AAR operates through Aviation Services and Expeditionary Services.
Key Financial Metrics
| Metric | Three months ended Nov. 30, 2017 | Three months ended Nov. 30, 2016 | Six months ended Nov. 30, 2017 | Six months ended Nov. 30, 2016 |
|---|---|---|---|---|
| Sales | $449.7 million | $423.8 million | $888.9 million | $828.6 million |
| Gross profit | $20.9 million | $66.2 million | $85.4 million | $127.7 million |
| Gross margin | 4.6% | 15.6% | 9.6% | 15.4% |
| Operating income (loss) | $(33.9) million | $19.9 million | $(17.4) million | $36.6 million |
| Net income (loss) | $(22.6) million | $12.1 million | $(12.0) million | $21.6 million |
| Basic and diluted EPS | $(0.66) | $0.35 | $(0.35) | $0.63 |
- Segment performance: Aviation Services sales increased 13.0% to $391.6 million in the quarter and 12.0% to $762.9 million for six months. Segment gross profit increased 17.9% to $66.0 million in the quarter and 13.2% to $123.8 million for six months.
- Expeditionary Services sales decreased 24.6% to $58.1 million in the quarter and 14.5% to $126.0 million for six months. The segment recorded gross losses of $45.1 million and $38.4 million, respectively, versus gross profits of $10.2 million and $18.3 million in the comparable periods.
- Effective tax rates on continuing operations were 37.2% for the quarter and 43.3% for six months, compared with 35.6% and 35.7%, respectively, in the prior-year periods.
- Cash flow from operating activities was negative $9.9 million for six months, including negative $8.7 million from continuing operations, versus negative $1.2 million and negative $0.3 million, respectively, in the prior year.
- Investing cash outflow was $32.8 million, including $22.9 million paid for the acquisition of two Canadian MRO facilities. Financing cash inflow was $59.5 million, primarily from $37.0 million of short-term borrowings and $24.8 million of term-loan proceeds.
Financial Position, Debt and Liquidity
- Cash and cash equivalents were $27.1 million at November 30, 2017, compared with $10.3 million at May 31, 2017. Working capital was $555.7 million.
- Total debt was $219.4 million, compared with $159.3 million at May 31, 2017. Debt included $168.0 million outstanding under the revolving credit facility, a $24.0 million term loan, a $25.0 million industrial revenue bond and $2.4 million of capital lease obligations.
- The $500 million revolving credit facility matures November 1, 2021. Approximately $315.5 million remained available after borrowings and letters of credit; an additional $9.8 million was available under foreign credit lines.
- Management stated that the company was in compliance with all financing covenants. Cash plus unused revolving-credit capacity was reported at $342.6 million.
Material Changes and Unusual Items
- The company recognized $54.2 million of impairment and other charges related to Contractor-Owned, Contractor-Operated aircraft and related assets: $14.5 million aircraft impairment, $21.2 million inventory reserves, $15.9 million rotable-asset impairment and $2.6 million of other impairment charges. No goodwill impairment was recorded.
- The charges primarily reflected completed contracts, aircraft not placed on new contracts, declining Department of Defense operational tempo and excess aircraft supply. The charges reduced second-quarter operating income by approximately $54.2 million.
- Aviation Services benefited from new commercial aviation supply-chain contracts and the September 2017 acquisition of two Premier Aviation MRO facilities in Canada for approximately $24.8 million. The acquired facilities contributed approximately $10.0 million of second-quarter sales.
- The KC-10 program continued to wind down. Related sales declined to $9.3 million in the quarter from $29.4 million and to $21.0 million for six months from $68.0 million in the prior-year periods.
- The Department of State’s INL/A Worldwide Aviation Support Services contract was upheld by the Court of Federal Claims, and transition task orders began. A related DynCorp lawsuit remained pending, with discovery stayed while AAR pursued summary judgment.
- The company adopted ASU 2016-09 effective June 1, 2017, recognizing excess stock-compensation tax benefits in income tax expense or benefit. The filing reports benefits of $0.4 million for the quarter and $1.6 million for six months.
Outlook, Risks and Contingencies
Management described the balance sheet as providing flexibility for opportunistic investment and continued shareholder returns, but the filing does not provide specific revenue, earnings or cash-flow guidance. Management expects to continue investing in commercial aviation and government and defense services.
- Key operating risks include continued weakness in defense operational tempo, excess aircraft capacity, contract losses or delays, execution of new aviation programs and the KC-10 wind-down.
- Liquidity depends on operating cash generation and borrowing capacity. Credit availability could be affected by credit-market conditions, economic and airline-industry conditions, geopolitical events and operating performance.
- The company is exposed to variable interest rates, foreign exchange movements and customer credit losses. Management stated that a hypothetical 10% U.S. dollar devaluation against foreign currencies would not have had a material impact.
- The company has unbilled KC-10-related receivables of $7.6 million because final customer paperwork required for billing had not been issued.
- DynCorp appealed the contract-award decision and continued litigation against AAR Airlift. The filing states that AAR believes the lawsuit is without merit; the ultimate outcome and potential exposure are not quantified.
- Future accounting changes include adoption of the new revenue-recognition standard beginning June 1, 2018 and the leases standard beginning June 1, 2019. The eventual impact of the leases standard had not been determined.
Investor Verification Items
- Verify whether the $54.2 million Expeditionary Services impairment represents the full expected exposure from underutilized aircraft, inventory and rotable assets.
- Assess the sustainability and profitability of Aviation Services’ new commercial contracts, including the acquired Canadian MRO facilities.
- Track the transition, task orders and potential revenue contribution from the INL/A WASS contract, together with the remaining DynCorp litigation and appeal risk.
- Monitor debt growth, variable-rate exposure, covenant headroom and the August 2018 industrial revenue bond maturity.
- Evaluate operating cash conversion, working-capital requirements and investment in rotable assets, particularly given negative operating cash flow for the first six months.
- Review the company’s forthcoming estimate of the cumulative impact of the revenue-recognition standard and its assessment of the leases standard.