AAR CORP. Fiscal 2012 Form 10-K Summary
Business context and reporting period
AAR CORP. is a diversified provider of aviation, government and defense products and services. Its four reporting segments are Aviation Supply Chain, Government and Defense Services, Maintenance, Repair and Overhaul, and Structures and Systems. The filing covers the fiscal year ended May 31, 2012; the metadata reference to “2011 Q4” does not match the filing period. Fiscal fourth-quarter data is included.
Fiscal 2012 included the acquisitions of Airinmar in October 2011 and Telair and Nordisk in December 2011. The company had approximately 6,700 employees and approximately $928.7 million of firm backlog at May 31, 2012, down from $963.1 million a year earlier.
Financial performance and liquidity
| Metric | Fiscal 2012 | Fiscal 2011 | Change |
|---|---|---|---|
| Sales | $2,065.0 million | $1,805.1 million | 14.4% increase |
| Gross profit | $318.6 million | $307.1 million | 3.7% increase |
| Gross margin | 15.4% | 17.0% | Down 160 basis points |
| Operating income | $130.7 million | $133.6 million | 2.2% decrease |
| Operating margin | 6.3% | 7.4% | Down 110 basis points |
| Net income attributable to AAR | $67.7 million | $69.8 million | 3.0% decrease |
| Diluted EPS | $1.65 | $1.73 | 4.6% decrease |
| Cash flow from operations | $94.2 million | $108.6 million | 13.2% decrease |
Commercial sales increased 32.4% and represented 54.9% of consolidated sales. Government and defense sales declined 1.9% to $930.4 million, or 45.1% of sales. Segment sales were $588.4 million for Aviation Supply Chain, $552.7 million for Government and Defense Services, $422.2 million for MRO, and $501.7 million for Structures and Systems.
At May 31, 2012, cash was $67.7 million, working capital was $590.0 million, total assets were $2.20 billion, and total recourse debt was $792.2 million, compared with $425.3 million in 2011. The company reported $866.0 million of total equity. The unsecured revolving facility had $280.0 million drawn and approximately $285.7 million of remaining availability after letters of credit; an additional $31.98 million remained available under the secured Huntington facility.
Investing activities used $390.2 million, including $298.1 million for acquisitions and $91.2 million of capital expenditures. Financing activities provided $306.8 million, principally from new borrowings. Fiscal 2012 dividends totaled $12.1 million, or $0.30 per share.
Material changes versus the prior comparable period
- Aviation Supply Chain sales increased 26.5% and gross profit increased 39.1%; the margin improved to 18.0% from 16.4%, aided by product mix, aircraft sales and Airinmar revenue.
- Government and Defense Services sales decreased 3.3% and gross profit decreased 25.5%. Margin declined to 14.2% from 18.5%, reflecting weaker Airlift performance and a $9.5 million pre-tax adjustment to the KC10 support contract.
- MRO sales increased 7.2%, but gross profit declined 0.7% and margin fell to 13.1% from 14.2% because of lower high-margin engineering revenue.
- Structures and Systems sales increased 33.8%, including $119.4 million from Telair and Nordisk. Margin declined to 15.6% from 18.5% because of product mix, program losses, start-up costs, and restructuring charges.
- Interest expense increased 20.5% to $37.8 million because of higher borrowings used to fund acquisitions. The effective tax rate declined to 27.2% from 32.5%, including a $3.3 million tax benefit in the fourth quarter and a $4.0 million state-tax benefit in the third quarter.
- Fiscal fourth-quarter sales were $563.3 million, gross profit was $77.3 million, net income attributable to AAR was $12.9 million, and diluted EPS was $0.32, compared with $487.8 million, $83.2 million, $21.4 million, and $0.52, respectively, in the prior-year quarter.
Guidance, outlook, risks and unusual items
Management expected fiscal 2013 sales of approximately $2.1 billion to $2.2 billion and diluted EPS of $1.55 to $1.65. Commercial aviation results were expected to remain strong, supported by the full-year contribution from Telair and Nordisk. Management expected improved Airlift results from aircraft-availability and cost-reduction actions, but anticipated declines in mobility products and defense systems logistics.
- Defense spending reductions under the Budget Control Act and potential sequestration could reduce government revenue, particularly in Structures and Systems. U.S. government and contractor sales represented 43.0% of fiscal 2012 revenue.
- Airlift revenue is concentrated in expeditionary airlift services in Afghanistan, creating exposure to troop withdrawals and contract reductions.
- The A400M cargo-system program had experienced delays, with first shipments pushed to late fiscal 2013 or early fiscal 2014. Capitalized development costs were $91.9 million, creating recoverability risk if deliveries, pricing or orders deteriorate.
- The company recorded $3.7 million of fourth-quarter restructuring and impairment charges to close two manufacturing plants and idle another facility in Structures and Systems.
- Fixed-price contracts expose AAR to labor, material, fuel, operational-efficiency and cost-overrun risk. The KC10 contract adjustment illustrates this exposure.
- The company had $451.3 million of contractual debt payments due in fiscal 2013, including convertible notes subject to holder put rights, and $363.7 million of bank borrowings under the contractual-obligations table.
- The pension plan funded status deteriorated to a $35.3 million deficit from $10.7 million, and management anticipated fiscal 2013 pension contributions of $5.5 million to $7.5 million.
- Management reported no material pending legal proceedings, compliance with all debt covenants, effective disclosure controls, and an unqualified audit opinion. The internal-control audit excluded the acquired Telair, Nordisk and Airinmar businesses.
Most important facts for investors to verify
- Reconcile the sharp fiscal fourth-quarter earnings decline with the KC10 contract charge, Structures and Systems restructuring, Airlift margins, acquisition-related expenses and tax benefits.
- Assess leverage, refinancing requirements and liquidity after the acquisition-related increase in recourse debt, including the February 2013 put date for the 1.75% convertible notes.
- Track commercial sales growth and whether the full-year Telair and Nordisk contribution offsets expected defense and mobility-product declines.
- Evaluate the recoverability of the $91.9 million A400M development asset and the timing, pricing and execution of the program.
- Monitor Afghanistan exposure, U.S. defense-budget reductions, contract renewals and the KC10 program’s revised profitability.
- Review acquisition purchase-price allocations, including the preliminary valuation of acquired assets, liabilities, goodwill and Airinmar’s potential $20.3 million earn-out.
- Check inventory growth, working-capital requirements, backlog conversion and operating cash flow relative to reported earnings.