AAR CORP. 10-Q Summary
Business Context and Reporting Period
AAR CORP. reported results for the three and nine months ended February 28, 2023, its fiscal 2023 third quarter. The company operates through Aviation Services, which includes aviation aftermarket supply-chain and maintenance, repair and overhaul activities, and Expeditionary Services, which primarily manufactures mobility products for government and defense customers. The filing is unaudited.
Key Financial Metrics
| Metric | Three Months Ended February 28, 2023 | Year-over-Year Change | Nine Months Ended February 28, 2023 | Year-over-Year Change |
|---|---|---|---|---|
| Sales | $521.1 million | 15.2% increase | $1,437.2 million | 7.0% increase |
| Operating income | $34.0 million | 12.2% increase | $97.6 million | 29.3% increase |
| Income from continuing operations | $21.8 million | 3.5% decrease | $66.6 million | 22.0% increase |
| Net income | $21.8 million | Approximately 3.1% decrease | $67.0 million | 22.3% increase |
| Diluted EPS | $0.62 | Down from $0.63 | $1.88 | Up from $1.53 |
| Net cash from operating activities | Not separately reported for the quarter | — | $(21.9) million, including discontinued operations | Down from $35.1 million provided |
Consolidated gross profit was $94.3 million in the third quarter, or approximately 18.1% of sales, compared with approximately 17.8% in the prior-year quarter. Operating margin was approximately 6.5%, compared with 6.7% previously. For the nine-month period, gross margin was approximately 18.2% versus 16.6%, and operating margin was approximately 6.8% versus 5.6%.
At February 28, 2023, cash and cash equivalents were $52.7 million, restricted cash was $1.4 million, and working capital was $736.2 million. Long-term debt was $185.6 million, compared with $98.9 million at May 31, 2022. Borrowings under the revolving credit facility were $188.0 million, with approximately $420.8 million of availability after outstanding letters of credit.
Material Changes Versus the Prior Comparable Period
- Aviation Services sales increased 13.9% in the quarter and 5.9% for the nine-month period. Commercial sales rose 28.2% in the quarter and 19.3% year to date, benefiting from continued recovery in commercial passenger air traffic.
- Quarterly commercial Aviation Services sales benefited from increased aftermarket trading activity, including $27.3 million of whole-asset sales, and higher new-parts distribution sales.
- Government and defense sales declined 7.6% in the quarter and 15.1% year to date, primarily due to completion of certain government programs.
- Expeditionary Services sales increased 54.9% in the quarter and 34.1% year to date, primarily from higher mobility-product volumes, while its margins declined due to product mix.
- Interest expense increased to $3.8 million in the quarter from $0.6 million, reflecting higher borrowing levels and interest rates. The average borrowing rate increased to 5.65% from 1.01%.
- Operating cash flow deteriorated primarily because of an $18.0 million Unison license-fee payment and increased inventory investment supporting aftermarket trading growth.
- The company repurchased 1.2 million shares for $50.1 million during the nine-month period. Since renewal of the program, cumulative repurchases totaled $92.4 million of a $150 million authorization.
Guidance, Outlook, Risks and Unusual Items
Management expects long-term strength in Aviation Services, supported by commercial aviation recovery and favorable commercial and government market trends. The company reported approximately $787 million of remaining performance obligations at February 28, 2023, with approximately 40% expected to be recognized as revenue over the next 12 months and approximately 60% over the next three years.
On March 20, 2023, after the reporting period, AAR acquired Trax USA Corp. for $120.0 million plus contingent consideration of up to $20.0 million. The acquisition was funded with revolving-credit borrowings and cash and is expected to add higher-margin recurring aviation software revenue. The filing states that preliminary purchase accounting was not yet available.
- The company recognized a $1.8 million liability for a Russian bankruptcy court judgment related to VIM-AVIA; the company is appealing and disputes the claims.
- A performance guarantee retained in connection with the sale of the Composites business could expose AAR to losses related to an A220 contract. A loss is reasonably possible, but the company cannot estimate a loss range and states that a material adverse effect cannot be ruled out.
- The company continues to cooperate with governmental reviews concerning potential Foreign Corrupt Practices Act violations relating to activities in Nepal and South Africa. The filing does not provide a clear estimate of potential exposure.
- AAR is evaluating a potential exit from its Indian joint venture. Its share of the joint venture’s losses was $1.2 million in the quarter and $2.0 million year to date.
- Remaining risks include commercial aviation conditions, government program timing, interest-rate exposure, foreign exchange, credit losses, contract estimates, acquisition integration, and broader economic and geopolitical conditions.
Management stated that disclosure controls and procedures were effective as of February 28, 2023, with no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether the commercial aviation recovery and Aviation Services growth offset declining government and defense revenue.
- The sustainability of improved year-to-date gross margins, particularly as aftermarket trading mix and product costs change.
- Working-capital requirements, inventory growth, negative operating cash flow, and reliance on revolving-credit borrowings.
- The impact of higher variable interest rates on future earnings and cash flow.
- Trax’s post-acquisition revenue, margins, integration costs, contingent consideration, and any required purchase-accounting adjustments.
- The potential financial exposure from the A220 performance guarantee, the FCPA-related reviews, the VIM-AVIA litigation, and the Indian joint venture.
- Progress toward the remaining $57.6 million of the company’s $150 million stock-repurchase authorization, considering liquidity and acquisition needs.