AAR CORP. Form 10-Q Summary
Business context and reporting period
This unaudited quarterly report covers the three and nine months ended February 28, 2011, AAR’s fiscal 2011 third quarter and year-to-date period. AAR operates through Aviation Supply Chain, Government and Defense Services, Maintenance, Repair and Overhaul, and Structures and Systems. The filing reflects the April 7, 2010 acquisition of Aviation Worldwide Services, now Airlift Group.
Financial performance and position
| Metric | Three months ended February 28, 2011 | Three months ended February 28, 2010 | Nine months ended February 28, 2011 | Nine months ended February 28, 2010 |
|---|---|---|---|---|
| Sales | $451.0 million | $300.8 million | $1,295.9 million | $951.6 million |
| Operating income | $35.3 million | $24.2 million | $99.4 million | $68.6 million |
| Income from continuing operations | $18.3 million | $10.5 million | $50.4 million | $33.5 million |
| Net income attributable to AAR | $17.9 million | $9.9 million | $48.4 million | $33.4 million |
| Diluted EPS | $0.44 | $0.26 | $1.21 | $0.87 |
- Sales increased 49.9% in the quarter and 36.2% year to date. Operating margins were approximately 7.8% and 7.7%, respectively, versus approximately 8.0% and 7.2% in the comparable periods.
- Quarterly gross profit was $77.8 million, or approximately 17.2% of sales, compared with $58.2 million, or approximately 19.4%, in the prior-year quarter. Year-to-date gross profit was $221.5 million, or approximately 17.1% of sales, compared with $173.6 million, or approximately 18.2%.
- Year-to-date cash provided by operating activities was $59.9 million, compared with $94.6 million in the prior-year period. Capital expenditures were $82.4 million, primarily for helicopters and other equipment supporting Government and Defense Services.
- Cash and cash equivalents were $54.7 million at February 28, 2011, down from $79.4 million at May 31, 2010. Working capital was $508.7 million.
- Recourse debt was $367.0 million, including $60.0 million of short-term borrowings and $53.3 million of current maturities. Non-recourse debt was $12.1 million. The company also had capital lease obligations of $7.2 million.
- A $250.0 million unsecured revolving credit facility had $60.0 million drawn and approximately $10.5 million of outstanding letters of credit at February 28, 2011. Approximately $3.5 million remained available under a foreign line of credit.
Material changes versus the prior comparable period
- Commercial customer sales increased 43.8% in the quarter and represented 49.2% of consolidated sales. Government and defense sales increased 56.4% and represented 50.8% of sales.
- Government and Defense Services sales increased 284.0% in the quarter and 259.2% year to date, largely because of Airlift revenue of $73.1 million in the quarter and $205.0 million year to date.
- Maintenance, Repair and Overhaul sales increased 52.9% in the quarter, with gross margin improving to 15.9% from 12.0% due primarily to higher volume and mix.
- Structures and Systems sales declined 25.3% in the quarter and 18.9% year to date because of expected lower mobility-products volume; quarterly gross margin fell to 18.4% from 23.2%.
- Government and Defense Services quarterly gross margin declined to 17.4% from 24.0%, reflecting transition costs on a new performance-based logistics program and a contract pricing adjustment.
- Accounts receivable increased to $300.0 million from $238.5 million at May 31, 2010, while inventories increased to $385.4 million from $370.3 million, contributing to lower operating cash flow.
- Property, plant and equipment increased to $318.9 million from $224.9 million, primarily reflecting growth-related investment.
Guidance, outlook, risks and unusual items
- Management reported improving commercial airline revenues, fleet utilization, and outsourcing demand, and stated that the recovery in commercial demand gained momentum during the third quarter.
- Management expects airlines to continue outsourcing maintenance and support functions and is targeting additional U.S. government agencies for Airlift services. No quantified earnings or revenue guidance was provided.
- The revolving credit agreement expired August 31, 2011, and the company was discussing renewal and expansion with lenders. Future access to borrowing and capital markets may be affected by credit-market, economic, airline-industry, geopolitical, and operating conditions.
- AAR decided to exit its Amsterdam component repair facility and was evaluating strategic alternatives, including a sale. The unit had approximately $10.0 million of carrying value, and management expected to recover it. Discontinued operations produced an after-tax loss of $0.4 million in the quarter and $2.0 million year to date.
- Net relocation expense for Airlift was approximately $1.6 million in the quarter after $2.0 million of Florida relocation assistance.
- The company retired $6.0 million par value of convertible notes for $4.7 million cash, recognizing a $0.1 million gain on extinguishment of debt.
- Key estimation risks include receivable collectability, inventory and aircraft impairment, goodwill valuation, revenue recognition on multi-element programs, recovery of A400M program development costs, pension assumptions, and aircraft lease residual values.
- A former lessee of two wholly owned aircraft was in arrears. AAR obtained a judgment and expected to recover past-due rentals. The filing does not provide a specific recovery date.
- Management reported no material changes to market risk or previously disclosed risk factors. Disclosure controls were concluded to be effective as of February 28, 2011.
Important facts for investors to verify
- Verify renewal, expansion, and final terms of the revolving credit facility after its August 31, 2011 expiration.
- Assess whether Airlift revenue, margins, and cash generation justify the acquisition and related growth capital expenditures.
- Monitor working-capital growth, especially accounts receivable, inventory, and equipment held for lease, and its effect on operating cash flow.
- Evaluate the sustainability of Government and Defense Services margins after transition costs and contract pricing adjustments.
- Track the disposition and final accounting for the Amsterdam facility and any related impairment or restructuring charges.
- Review exposure to convertible debt, upcoming maturities, aircraft lease recoveries, and potential aircraft, inventory, goodwill, and A400M development-cost impairments.