AAR CORP. 10-K Summary: Fiscal Year Ended May 31, 2008
Business Context and Reporting Period
This report covers the fiscal year ended May 31, 2008. AAR CORP. is a diversified provider of products and services to the worldwide aviation and defense industries. The company operates through four segments: Aviation Supply Chain, Maintenance, Repair and Overhaul (MRO), Structures and Systems, and Aircraft Sales and Leasing. During the period, AAR completed four acquisitions, including Summa Technology, Inc. and Avborne Heavy Maintenance, Inc., to expand its defense and MRO capabilities.
Key Financial Metrics
| Metric | Fiscal 2008 | Fiscal 2007 |
|---|---|---|
| Total Sales | $1,384,919 | $1,061,169 |
| Gross Profit | $264,072 | $184,147 |
| Operating Income | $134,518 | $95,366 |
| Net Income | $75,144 | $58,660 |
| Diluted EPS | $1.76 | $1.40 |
| Cash from Operations | $16,926 | ($21,239) |
| Total Debt (Recourse + Non-Recourse) | $517,910 | $327,856 |
| Working Capital | $564,932 | $389,215 |
| Cash and Equivalents | $109,391 | $83,317 |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated sales increased 30.5% to $1.38 billion, driven by double-digit growth in all segments. Commercial sales rose 27.8% and defense sales rose 36.7%.
- Segment Performance:
- Aviation Supply Chain: Sales up 11.6%; Gross profit margin improved to 23.9% from 21.0%.
- MRO: Sales up 42.2% due to increased volume and the Avborne acquisition.
- Structures and Systems: Sales up 47.5% driven by defense demand and acquisitions (Summa and Brown).
- Aircraft Sales and Leasing: Sales up 110.4% due to the sale of five aircraft.
- Debt Structure: In February 2008, the company issued $250 million in convertible senior notes ($137.5M due 2014 and $112.5M due 2016). Total recourse debt increased significantly to support growth and acquisitions.
- Impairments: Unlike fiscal 2007, which included $7.65 million in impairment charges, fiscal 2008 had no impairment charges recorded.
Outlook, Risks, and Contingencies
- Industry Headwinds: Management notes that high oil prices and softening economic conditions have led U.S. carriers to announce capacity reductions (10-15% of the fleet), which may reduce demand for parts and maintenance.
- Customer Credit Risk: Mesa Airlines, a significant customer ($73 million in sales), warned of potential bankruptcy. AAR holds approximately $13 million in receivables and $51 million in leased equipment related to Mesa.
- Government Contracts: 31.7% of sales are to the U.S. Department of Defense. These contracts are subject to funding changes and competitive bidding.
- A400M Program: Significant development costs ($43 million capitalized) are associated with the A400M cargo system. Delays in the program could impact the recovery of these costs.
- Legal Proceedings: An ongoing environmental dispute with the Michigan Department of Environmental Quality regarding the Cadillac, Michigan plant remains unresolved, though management does not expect a material adverse effect.
Investor Verification Checklist
- Verify the financial stability and payment status of Mesa Airlines, given the concentration of receivables and leased assets.
- Monitor the impact of airline capacity reductions on the Aviation Supply Chain and MRO segments in the coming quarters.
- Review the progress and potential delays of the A400M cargo system program and its effect on capitalized development costs.
- Assess the company's ability to re-lease or sell aircraft in the joint venture portfolio as leases expire in fiscal 2009.
- Confirm compliance with debt covenants, particularly given the increased leverage from the $250 million convertible note issuance.