AAR CORP. Fiscal 2022 Form 10-K Summary
Business context and reporting period
This filing is AAR CORP.’s Annual Report on Form 10-K for the fiscal year ended May 31, 2022, filed July 21, 2022. The supplied metadata refers to “2021 Q4,” but the filing reports fiscal 2022 annual results, not a quarterly period.
AAR provides aviation aftermarket products and services to commercial aviation and government and defense customers. Its two segments are Aviation Services, representing approximately 95% of fiscal 2022 sales, and Expeditionary Services, representing approximately 5%.
Financial performance and key metrics
| Metric | Fiscal 2022 | Fiscal 2021 | Change |
|---|---|---|---|
| Sales | $1,820.0 million | $1,652.3 million | 10.1% increase |
| Gross profit | $313.2 million | $275.9 million | 13.5% increase |
| Gross margin | 17.2% | 16.7% | Improved |
| Operating income | $106.9 million | $85.2 million | 25.5% increase |
| Operating margin | 5.9% | 5.2% | Improved |
| Income from continuing operations | $78.5 million | $46.3 million | 69.5% increase |
| Net income | $78.7 million | $35.8 million | 120.1% increase |
| Diluted EPS | $2.17 | $1.00 | 117.0% increase |
| Operating cash flow from continuing operations | $89.8 million | $108.5 million | 17.2% decrease |
- Aviation Services sales increased 12.4% to $1,745.8 million, led by commercial sales growth of 36.2% to $1,081.6 million. Aviation Services gross profit increased 13.0% to $297.5 million.
- Expeditionary Services sales declined 24.7% to $74.2 million, while gross profit increased 23.6% to $15.7 million. Segment margin improved to 21.2% from 12.9%, primarily because the unprofitable composites business was divested in fiscal 2021.
- Commercial sales increased $277.4 million, or 34.4%, while government sales decreased $109.7 million, or 13.0%.
- Cash and cash equivalents were $53.5 million at May 31, 2022. Working capital was $659.0 million, including cash.
- Revolving Credit Facility borrowings were $100.0 million, with $488.6 million of availability after approximately $11.4 million of letters of credit. The facility matures September 25, 2024.
- Total debt was $100.0 million before debt issuance costs, compared with $135.2 million at May 31, 2021. A Canadian term loan was repaid at maturity on November 1, 2021.
- The Company sold $283.3 million of receivables under its $150 million receivables purchase program during fiscal 2022. The filing does not provide a separate adjusted EBITDA measure.
Material changes versus the prior comparable period
- Commercial aviation recovery drove higher MRO, parts distribution, and aftermarket trading activity. Whole-asset sales were $66.6 million versus $20.3 million in fiscal 2021.
- Government and defense revenue declined because of the U.S. withdrawal from Afghanistan, the natural completion of certain programs, and the absence of prior-year C-40 engine installation work. Afghanistan-related revenue was $43 million in fiscal 2022 versus $67 million in fiscal 2021.
- Fiscal 2021 benefited from $53.8 million of U.S. and foreign government workforce subsidies, which did not recur at the same level in fiscal 2022. Despite this comparison, commercial gross profit increased and overall margins improved.
- Provision for credit losses declined to $1.2 million from $8.5 million as commercial airline credit conditions improved.
- Losses related to the sale and exit of businesses declined to $1.7 million from $20.2 million. Fiscal 2021 included the loss on the composites divestiture; fiscal 2022 included charges related to contingent consideration and buyer receivables after the buyer’s bankruptcy filing.
- Operating cash flow declined because fiscal 2021 benefited from a large inventory reduction and the $48.5 million CARES Act grant, partly offset by a $25 million license fee paid in fiscal 2021.
- AAR repurchased approximately 1.0 million shares for $42.4 million in fiscal 2022. No dividends were declared.
Guidance, outlook, risks and unusual items
- Management expects long-term strength in Aviation Services, citing favorable commercial aftermarket trends, recovery in commercial markets, and continued government and defense opportunities. No specific revenue, earnings, or margin guidance was provided.
- Firm backlog was approximately $850 million at May 31, 2022. Approximately 45% was expected to be recognized over the next 12 months and approximately 55% of the remaining balance over the following three years.
- AAR received a $365 million, 10-year firm fixed-price ID/IQ Air Force contract supporting USAFE F-16 aircraft, including depot work and service-life-extension modifications.
- Key risks include commercial aviation cyclicality, COVID-19 recovery uncertainty, inflation and labor shortages, supply-chain disruptions, fixed-price contract cost overruns, dependence on government funding and contract renewals, regulatory compliance, cybersecurity, aircraft and inventory impairment, and customer credit risk.
- The Company has a performance guarantee related to the divested composites business. The buyer filed for bankruptcy, and the customer has asserted losses under the guarantee. AAR believes it has defenses, but states that a loss is reasonably possible and that it cannot estimate a loss range.
- AAR self-reported potential Foreign Corrupt Practices Act and other compliance violations involving Nepal and South Africa to the Department of Justice, SEC, and UK Serious Fraud Office. The Company could not predict the outcome.
- A Russian bankruptcy claw-back action alleges that AAR subsidiaries owe approximately $13 million relating to four engines. The Company disputes the claims; due to the Russia/Ukraine conflict, a loss is considered reasonably possible, but no loss range can be estimated.
- Remaining forward-loss reserves included $1.3 million for certain power-by-the-hour contracts and $3.1 million related to minimum repair-volume guarantees.
- The Indian joint venture commenced airframe maintenance operations during fiscal 2022. AAR owns 40%, guaranteed 40% of the joint venture’s debt, and recorded a $9.0 million guarantee liability.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal control over financial reporting were effective as of May 31, 2022.
Most important facts for investors to verify
- Confirm the sustainability of commercial aviation recovery, particularly MRO and parts-distribution growth, without the level of prior-year government subsidies.
- Monitor government and defense revenue following the Afghanistan-related program reductions and verify execution and funded orders under the $365 million F-16 contract.
- Reconcile operating cash flow with earnings, inventory growth, receivables, contract assets, and continuing use of receivables sales for liquidity.
- Review revolving-credit covenants, variable-rate exposure, the September 2024 maturity, and the $488.6 million reported availability.
- Assess potential exposure from the composites performance guarantee, FCPA-related reviews, and Russian bankruptcy litigation, for which the filing provides no reliable loss range.
- Evaluate inventory recoverability and long-term program estimates; inventory was $550.5 million and fiscal 2022 included $10.0 million of net favorable cumulative catch-up adjustments.
- Confirm the timing and economics of the planned termination and transfer of the overfunded merged U.S. pension plan.