AAR CORP. Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended February 28, 2015. The filing is for fiscal 2015 Q3, although the request metadata identifies it as “2014 Q3.” Results are unaudited and continuing-operations figures exclude businesses classified as discontinued operations.
Business Context
AAR reorganized its reporting structure into two segments: Aviation Services, including supply chain and maintenance, repair and overhaul activities, and Expeditionary Services, including airlift and mobility activities. Telair Cargo Group and Precision Systems Manufacturing were classified as discontinued operations.
Key Financial Metrics
| Metric | Three Months Ended February 28, 2015 | Prior Year | Nine Months Ended February 28, 2015 | Prior Year |
|---|---|---|---|---|
| Sales | $380.1 million | $399.8 million | $1,178.5 million | $1,288.5 million |
| Operating income | $9.0 million | $29.1 million | $61.2 million | $97.6 million |
| Income from continuing operations attributable to AAR | $1.9 million | $16.9 million | $27.6 million | $52.3 million |
| Net income attributable to AAR | $(34.5) million | $17.9 million | $(4.9) million | $55.8 million |
| Diluted EPS | $(0.89) | $0.45 | $(0.15) | $1.40 |
| Cash flow from operations | Not provided for the quarter | Not provided for the quarter | $9.0 million | $76.7 million |
Consolidated gross profit was $50.1 million for the quarter and $179.7 million for the nine-month period, compared with $66.2 million and $215.4 million, respectively, in the prior-year periods. Consolidated operating margins were approximately 2.4% for the quarter and 5.2% for the nine months, versus approximately 7.3% and 7.6% previously.
Aviation Services sales increased 9.9% to $318.4 million in the quarter and 3.5% to $955.9 million for the nine months. Segment gross profit increased 32.4% to $50.7 million in the quarter and 21.8% to $152.8 million for the nine months.
Expeditionary Services sales declined 44.0% to $61.7 million in the quarter and 39.0% to $222.6 million for the nine months. Segment gross profit declined to a $(0.6) million loss in the quarter and $26.9 million for the nine months, compared with $27.9 million and $89.9 million, respectively.
At February 28, 2015, cash and cash equivalents were $67.0 million, compared with $89.2 million at May 31, 2014. Working capital was $1,104.1 million. Total debt was $643.3 million, including $43.9 million of current maturities and $599.4 million of long-term debt. The company reported compliance with all debt covenants.
Material Changes Versus the Prior Comparable Period
- Sales fell $110.0 million, or 8.5%, for the first nine months, primarily because of lower U.S. Department of Defense demand for expeditionary airlift services in Afghanistan.
- Expeditionary airlift revenue declined $122.8 million for the nine months. The revenue-service fleet decreased from 40 aircraft at the beginning of fiscal 2014 to 19 aircraft at February 28, 2015.
- Commercial and defense Aviation Services benefited from higher supply-chain volumes and new contract wins. Supply-chain sales increased 17.0% during the nine-month period.
- Operating income declined 69.1% in the quarter and 37.3% for the nine months, driven primarily by weaker Expeditionary Services performance and higher quarterly SG&A.
- SG&A increased $4.0 million in the quarter to $41.7 million, including $1.4 million of severance costs and increased business-development spending. Nine-month SG&A was unchanged at $120.3 million.
- Operating cash flow decreased $67.7 million year over year to $9.0 million, primarily because of increased accounts receivable and inventory associated with new supply-chain contracts.
- Accumulated other comprehensive loss increased to $78.7 million from $29.3 million, primarily due to currency translation losses of $49.9 million.
Discontinued Operations, Outlook and Unusual Items
- Precision Systems Manufacturing was classified as held for sale, and AAR recorded a $46.4 million pre-tax impairment charge in the quarter. Discontinued operations produced a loss attributable to AAR of $36.4 million for the quarter and $32.5 million for the nine months.
- On March 26, 2015, AAR completed the sale of Telair Cargo Group to TransDigm for $725 million, subject to post-closing adjustments. Cash received at closing was $705 million, with $20 million placed in escrow and potential contingent consideration of up to $15 million. Management expected net cash proceeds after taxes and expenses of approximately $600 million and a pre-tax gain of approximately $200 million.
- AAR issued notice to redeem its $325 million 7.25% senior notes. The redemption is expected to include an approximately $45 million make-whole premium, to be recorded as a pre-tax charge in the fourth quarter of fiscal 2015.
- On March 24, 2015, the revolving credit commitment was increased from $475 million to $500 million, with potential expansion to $750 million, and maturity was extended to March 24, 2020. The amendment also replaced the minimum fixed-charge coverage ratio with a minimum interest-coverage ratio.
- At February 28, 2015, $185.0 million was outstanding under the revolving facility, approximately $15.0 million of letters of credit reduced availability, and approximately $275.0 million remained available. A separate $5.1 million foreign credit line was also available.
- AAR announced a new authorization to repurchase up to $250 million of common stock. The filing does not state that the full authorization will be used.
- Management cited expected continued strength in Aviation Services from new contracts and supply-chain investments, and stated that the airlift opportunity pipeline could allow idled aircraft to return to service. No quantified earnings or revenue guidance was provided.
- Key risks include reduced defense and Afghanistan-related demand, aircraft utilization and resale values, working-capital requirements, contract execution, interest-rate and foreign-currency exposure, access to financing, and compliance with debt covenants. The filing states that there were no material changes to previously disclosed risk factors.
Investor Verification Priorities
- Verify the final proceeds, escrow release, contingent consideration, taxes, transaction costs and recorded gain from the Telair sale.
- Verify the final redemption cost and accounting treatment for the 7.25% senior notes, including the approximately $45 million make-whole premium.
- Monitor Aviation Services contract wins, supply-chain working-capital consumption and conversion of revenue growth into operating cash flow.
- Assess whether idled expeditionary aircraft return to revenue service and whether airlift margins recover from the quarterly loss.
- Review the carrying values and eventual sale proceeds of Precision Systems Manufacturing and the 12 aircraft held for sale.
- Confirm compliance with the amended credit agreement, availability under revolving and secured facilities, and the effect of planned debt reduction and share repurchases on liquidity.