AAR CORP. Form 10-K Summary
Reporting period: Fiscal year ended May 31, 2015. The filing also provides unaudited fourth-quarter data for the quarter ended May 31, 2015; the request metadata references “2014 Q4,” but the source document is the fiscal 2015 Form 10-K.
Business Context
AAR provides aviation aftermarket products and services and expeditionary products and airlift services to commercial aviation, government and defense customers. Following a strategic review, management narrowed its focus to Aviation Services and Expeditionary Services, while pursuing the divestiture of manufacturing operations.
- Aviation Services generated $1,316.1 million of fiscal 2015 sales, or 83% of consolidated sales, compared with $1,231.2 million in fiscal 2014.
- Expeditionary Services generated $278.2 million of sales, or 17% of consolidated sales, compared with $477.9 million in fiscal 2014.
- Government and defense sales were $589.8 million, or 37.0% of consolidated sales, down from $777.5 million, or 45.4%, in fiscal 2014.
- Backlog was approximately $950.6 million at May 31, 2015, including approximately $450.7 million expected to be fulfilled within 12 months.
Financial Results and Key Metrics
| Metric | Fiscal 2015 | Fiscal 2014 | Change |
|---|---|---|---|
| Sales | $1,594.3 million | $1,709.1 million | Down 6.7% |
| Gross profit | $159.3 million | $288.9 million | Down 44.9% |
| Gross margin | 10.0% | 16.9% | Down 6.9 percentage points |
| Operating income (loss) | $(11.9) million | $125.6 million | Declined $137.5 million |
| Income (loss) from continuing operations | $(54.5) million | $67.2 million | Turned to loss |
| Net income attributable to AAR | $10.2 million | $72.9 million | Down 86.0% |
| Diluted EPS | $0.24 | $1.83 | Down $1.59 |
| Cash dividends | $12.5 million | $11.8 million | Increased |
Fiscal 2015 results included substantial unusual items. The fourth-quarter gross profit was negative $20.4 million and the continuing-operations loss was $82.1 million, primarily reflecting impairment charges and other losses of $71.4 million and a $44.9 million loss on extinguishment of debt.
Cash Flow, Debt and Liquidity
- Cash flow from operating activities was negative $43.0 million, compared with $139.8 million provided in fiscal 2014.
- Investing activities provided $689.2 million, principally from $686.1 million of net proceeds from the Telair Cargo Group sale and a $40.3 million sale-leaseback advance.
- Financing activities used $678.1 million, including $394.8 million of debt repayments, a $45.6 million debt-retirement premium and $151.5 million for share repurchases.
- Cash and cash equivalents were $54.7 million at May 31, 2015, compared with $89.2 million at May 31, 2014. Working capital was $542.1 million.
- Total debt declined to $154.0 million from $634.0 million. Net debt was $99.3 million.
- The amended revolving credit facility increased to $500 million and matures March 24, 2020. Borrowings were $50.0 million, with approximately $434.6 million of availability after outstanding letters of credit.
- Management reported cash plus unused credit capacity of approximately $490 million and compliance with all financing covenants at year-end.
Material Changes Versus the Prior Period
- Telair Cargo Group was sold on March 26, 2015 for $725 million, generating a $198.6 million pretax gain and $686.1 million of net cash proceeds. Up to $35 million of additional contingent consideration could be realized.
- PSM was designated for sale, and $57.5 million of impairment charges were recorded to reduce its assets to expected sale value.
- The Company recorded $71.4 million of impairment charges and other losses on underperforming product lines, aircraft, inventory and rotable assets, while generating approximately $57.1 million of cash from related actions.
- Expeditionary Services sales fell 41.8%, primarily due to reduced aircraft positions and lower demand associated with the U.S. military drawdown in Afghanistan.
- Aviation Services sales increased 6.9%, but gross profit decreased 16.6%; commercial gross margin declined to 9.5% from 15.0% because of inventory and asset actions and lower MRO volumes.
- The Company repurchased 4,682,620 shares for $151.5 million, including a May 29 tender offer for 4,185,960 shares at $31.90 per share.
- The Hot Springs, Arkansas regional maintenance facility was scheduled for closure, with approximately $1.5 million of expected fiscal 2016 exit costs.
Outlook, Risks and Unusual Items
Management expects continued growth in Aviation Services, supported by commercial aviation demand and customer interest in outsourced supply-chain and maintenance programs. It also expects to pursue opportunistic investments in aviation and expeditionary services. Management believes the airlift opportunity pipeline may return idled aircraft to service and cited new opportunities in Africa, Iraq and a United Nations contract in the Democratic Republic of Congo.
- Defense spending, contract renewals, competitive bidding, sequestration and government funding remain significant uncertainties. U.S. government and contractor sales represented 30.9% of fiscal 2015 revenue.
- Expeditionary airlift revenue remains exposed to further troop reductions and contract cancellations or nonrenewals in Afghanistan.
- Commercial aviation cyclicality, airline financial distress, aircraft retirements, maintenance outsourcing trends and aircraft utilization could affect demand.
- Fixed-price contracts expose the Company to labor, materials, fuel, overhead and execution-cost overruns.
- Asset values, inventory recoverability, aircraft resale values and goodwill depend on forecasts and could result in additional impairment charges.
- The KC10 program included $21.1 million of unbilled receivables and $7.5 million of costs in excess of billings at May 31, 2015. The Company expects recovery through future billings but has recorded a 0% margin on the flight-hour portion.
- Contractual obligations included $70.8 million of debt maturities in fiscal 2016, $103.9 million of operating lease commitments and $244.7 million of purchase obligations.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Investor Verification Checklist
- Verify the final proceeds and any contingent consideration from the Telair Cargo Group sale.
- Track completion and proceeds from the planned PSM divestiture and any related impairments.
- Assess whether Aviation Services margin recovery offsets continued weakness in Expeditionary Services.
- Monitor Afghanistan aircraft positions, contract renewals and redeployment of idled aircraft.
- Reconcile cash flow generation after the sale-related proceeds and confirm the timing of fiscal 2016 debt maturities.
- Review the collectability and future billing assumptions associated with the KC10 program.
- Evaluate the impact of the Hot Springs facility closure and other restructuring costs.