AAR CORP. Form 10-Q Summary
Business context and reporting period
AAR CORP. operates through Aviation Services, providing aftermarket parts, supply-chain management, and maintenance, repair and overhaul services, and Expeditionary Services, providing military mobility products and related engineering services. The filing covers the quarter and nine months ended February 28, 2022, representing fiscal 2022 third quarter results. The statements are unaudited.
Key financial metrics
| Metric | Three months ended February 28, 2022 | Prior-year period | Nine months ended February 28, 2022 | Prior-year period |
|---|---|---|---|---|
| Sales | $452.2 million | $410.3 million | $1,343.9 million | $1,214.7 million |
| Operating income | $30.3 million | $39.7 million | $75.5 million | $64.5 million |
| Income from continuing operations | $22.6 million | $31.1 million | $54.6 million | $31.6 million |
| Net income | $22.5 million | $28.1 million | $54.8 million | $21.8 million |
| Diluted EPS | $0.63 | $0.79 | $1.53 | $0.61 |
| Operating cash flow | Not separately provided | Not separately provided | $35.1 million | $82.6 million |
- Third-quarter sales increased 10.2%; nine-month sales increased 10.6%.
- Consolidated gross profit was $80.4 million in the quarter versus $86.0 million in the prior year, implying a gross margin of approximately 17.8% versus 21.0%. Nine-month gross profit was $223.4 million versus $204.1 million, with an approximately 16.6% margin versus 16.8%.
- Third-quarter operating margin was approximately 6.7% versus 9.7%; nine-month operating margin was approximately 5.6% versus 5.3%.
- Cash, cash equivalents and restricted cash totaled $43.0 million at February 28, 2022, including $40.6 million of unrestricted cash.
- Working capital was $634.1 million. Total debt was $104.5 million before $1.2 million of debt issuance costs, compared with $135.2 million before costs at May 31, 2021.
- The $600 million revolving credit facility had $104.5 million drawn and approximately $11.4 million of letters of credit, leaving reported availability of $484.1 million. The company was in compliance with its debt covenants.
- Firm backlog, or remaining performance obligations, was approximately $825 million; approximately 40% was expected to be recognized within 12 months.
Material changes versus the prior comparable periods
- Aviation Services sales increased 12.4% in the quarter and 13.6% year to date, led by commercial customer sales increases of 29.0% and 39.1%, respectively, as commercial passenger traffic recovered.
- Government and defense sales declined 5.9% in the quarter and 11.7% year to date, partly due to the wind-down of Afghanistan activities and the timing of C-40 aircraft work.
- Expeditionary Services sales declined 31.1% in the quarter and 33.2% year to date, primarily from lower mobility-product volume.
- Third-quarter Aviation Services gross profit declined 5.6% despite higher sales. Margins were pressured by the absence of prior-year government workforce subsidies and by business mix. The prior-year quarter included $24.1 million of subsidy benefits in Aviation Services cost of sales versus $0.9 million in the current quarter.
- Nine-month operating cash flow declined to $35.1 million from $82.6 million. Continuing-operations operating cash flow was $49.6 million versus $85.0 million, reflecting the prior-year $48.5 million CARES Act grant and working-capital differences.
- The company repurchased 500,239 shares for $20.2 million during the quarter. The renewed authorization permits up to $150 million of repurchases, with management stating an intention to use it by December 31, 2023.
Outlook, commentary, risks and unusual items
Management expects long-term strength in Aviation Services from commercial aviation recovery and demand from government and defense customers, but the filing does not provide quantitative revenue, earnings or margin guidance. Management continues to emphasize investment and growth in these markets.
- Risks include COVID-19 and variants, economic conditions, public-policy decisions, government contract volume and timing, aviation-sector weakness, supply-chain and labor pressures, and geopolitical developments.
- The company is monitoring the Russia-Ukraine conflict, sanctions and export controls. Fiscal 2021 sales to Russia and Ukraine totaled $3.8 million, or 0.2% of consolidated sales, but broader effects on energy costs, flight activity and the aviation sector remain uncertain.
- A Russian bankruptcy claw-back action alleges that company subsidiaries owe approximately $13 million relating to four engines. AAR disputes the claims, but stated that a loss became reasonably possible after the Russia-Ukraine developments; a loss range could not be estimated.
- The company is cooperating with government reviews concerning potential Foreign Corrupt Practices Act violations relating to Nepal and South Africa. The filing states that the potential outcome cannot currently be predicted.
- AAR recognized a $1.3 million charge in the first quarter of fiscal 2022 related to contingent consideration from the Composites business sale, reflecting that achievement of sales targets was unlikely.
- A PBH customer’s early termination resulted in a $5.2 million charge in the first quarter of fiscal 2022. Remaining related reserves were $0.9 million at February 28, 2022. Additional PBH-related reserves included $1.5 million for a forward-loss contract and $4.6 million for repair-volume guarantees.
- A Malaysia joint venture impairment and shutdown costs of $0.5 million were recognized in the third quarter. The India joint venture had commenced airframe maintenance operations and included a $9.3 million guarantee liability for 40% of its debt.
- The company paid the $25.7 million Canadian term loan at its November 1, 2021 maturity. It also sold $225.5 million of receivables during the nine months under a program with a $150 million maximum outstanding sale capacity.
Investor verification points
- Verify the sustainability of commercial aviation recovery, new-parts distribution growth and MRO volumes, particularly after the removal of government subsidy benefits.
- Review Aviation Services and government-program margins, including the effect of contract mix, cumulative catch-up adjustments and PBH contract losses.
- Assess cash conversion, receivables growth, inventory requirements and reliance on receivables sales to support liquidity.
- Monitor backlog conversion, government contract timing, Afghanistan-related revenue runoff and Expeditionary Services volume.
- Track the Russia-related litigation, FCPA investigations, sanctions exposure and any potential loss accruals.
- Confirm the terms and ongoing capacity of the revolving credit facility, covenant compliance and the effect of continued share repurchases on liquidity.