AAR CORP. 10-Q Summary: Quarter Ended February 28, 2007
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended February 28, 2007 (the third quarter of fiscal 2007) and the nine-month period ended on that date. AAR CORP. is a diversified provider of products and services to the worldwide aviation, aerospace, and defense industries, operating through four segments: Aviation Supply Chain, Maintenance, Repair and Overhaul (MRO), Structures and Systems, and Aircraft Sales and Leasing.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended 2/28/07 | 9 Months Ended 2/28/07 |
|---|---|---|
| Total Sales | $270,978 | $755,492 |
| Operating Income | $25,488 | $67,183 |
| Net Income | $15,261 | $40,813 |
| Diluted EPS | $0.36 | $0.98 |
| Cash and Equivalents | $105,111 (Balance Sheet) | $105,111 (Balance Sheet) |
| Working Capital | $412,474 | $412,474 |
| Total Debt (Current + Long-term) | $308,139 (Liabilities) | $308,139 (Liabilities) |
Note: Debt figures include current maturities and long-term debt. Non-recourse debt is included in current liabilities.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated sales increased 21.3% ($47.6M) for the quarter and 18.8% ($119.6M) for the nine-month period compared to the prior year. All four segments reported sales growth.
- Profitability: Net income increased 67% for the quarter and 83% for the nine-month period. Operating income rose 41.4% for the quarter and 52.0% for the nine-month period.
- Segment Performance:
- Aviation Supply Chain: Sales up 15.8% (quarter) and 19.5% (nine months) driven by commercial demand and new supply chain programs.
- MRO: Sales up 19.9% (quarter) and 17.2% (nine months) due to increased airframe maintenance and landing gear overhaul demand.
- Aircraft Sales & Leasing: Sales surged due to the sale of two owned aircraft ($16.5M) and earnings from joint ventures.
- Acquisitions: Acquired Reebaire Aircraft, Inc. for $11.8M in cash (January 2007) to expand regional MRO capacity. Subsequently acquired Brown International Corporation for $23.75M (April 2007).
- Discontinued Operations: Decided to exit the non-core industrial turbine business, classifying it as a discontinued operation with a net operating loss of $0.3M for the quarter.
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items:
- Impairment Charges: Recorded $7.7M in impairment charges during the nine-month period. This includes $4.8M for engine parts (pre-9/11 inventory) and $2.9M for a wide-body aircraft offered for sale.
- Gains: Recorded a $5.4M gain on the sale of a product line and a $2.9M gain on the extinguishment of debt related to a restructured aircraft lease.
- Outlook: Management expects the effective income tax rate to be 35% in fiscal 2008. The company anticipates continued demand for performance-based logistics and defense mobility products, though long-term demand is difficult to predict due to geopolitical factors (e.g., troop withdrawal from Iraq).
- Liquidity: The company maintains a $140M unsecured revolving credit facility (expandable to $175M) with no borrowings outstanding as of February 28, 2007. Cash flow from operations was minimal ($0.9M) for the nine-month period due to working capital changes and equipment investments.
- Risks: Key risks include general economic conditions, airline industry volatility, geo-political events, and the impact of high fuel costs on demand for certain aircraft parts.
Investor Verification Checklist
- Impairment Sustainability: Verify the remaining carrying value of pre-9/11 inventory and aircraft to assess potential for future write-downs.
- Acquisition Integration: Monitor the financial impact and integration progress of the Reebaire and Brown International acquisitions.
- Working Capital Trends: Analyze the $18M increase in accounts receivable and the reduction in accrued liabilities to understand cash flow pressures.
- Debt Structure: Review the terms of the $140M credit facility and the impact of the recent debt restructuring on future interest obligations.
- Discontinued Operations: Confirm the timeline and expected proceeds from the sale of the industrial turbine business.