AAR CORP. Form 10-Q Summary
Reporting period: Quarter and six months ended November 30, 2021, representing the second quarter of fiscal 2022. Results are unaudited and include continuing operations unless stated otherwise. AAR reports Aviation Services and Expeditionary Services segments.
Financial performance and position
| Metric | Three months ended Nov. 30, 2021 | Year-over-year change | Six months ended Nov. 30, 2021 | Year-over-year change |
|---|---|---|---|---|
| Sales | $436.6 million | Up 8.2% | $891.7 million | Up 10.9% |
| Operating income | $30.1 million | Up from $21.6 million | $45.2 million | Up from $24.8 million |
| Income from continuing operations | $20.8 million | Up from $14.4 million | $32.0 million | Up from $0.5 million |
| Net income | $20.8 million | Up from $8.2 million | $32.3 million | Up from $(6.3) million |
| Diluted EPS | $0.58 | Up from $0.23 | $0.90 | Up from $(0.18) |
| Operating cash flow | Not separately provided | Not applicable | $19.2 million consolidated; $33.4 million continuing operations | Down from $65.5 million consolidated; $67.4 million continuing operations |
Margins: Total segment gross profit was $78.4 million in the quarter and $143.0 million for the six-month period, implying gross margins of approximately 18.0% and 16.0%, respectively. Operating margins were approximately 6.9% and 5.1%. Aviation Services gross profit increased 10.8% in the quarter and 21.1% year to date. Expeditionary Services gross margin increased to 25.4% from 14.5% in the quarter and to 22.0% from 12.0% year to date.
Liquidity and debt: At November 30, 2021, cash and cash equivalents were $42.7 million, restricted cash was $3.7 million, and working capital was $626.5 million. Long-term debt was $103.2 million, consisting primarily of $104.5 million drawn on the revolving credit facility, net of debt issuance costs. The $25.7 million Canadian term loan was repaid at maturity on November 1, 2021. The $600 million revolving facility had approximately $483.4 million available after borrowings and letters of credit. AAR was in compliance with its financing covenants.
Balance-sheet changes: Accounts receivable increased to $192.1 million from $166.7 million at May 31, 2021, while inventories declined to $531.7 million from $540.6 million. Total equity increased to $1.007 billion from $974.4 million.
Material changes versus the prior comparable period
- Commercial aviation recovery drove Aviation Services commercial sales up 33.7% in the quarter and 44.9% year to date. Commercial MRO and aftermarket parts trading were the principal contributors.
- Government and defense sales declined 15.8% in the quarter and 14.5% year to date, primarily because prior-year periods included C-40 aircraft engine-installation activity and because of reduced volume on certain U.S. government contracts.
- Expeditionary Services sales declined 7.0% in the quarter and 34.1% year to date, while gross profit improved because of lower raw-material costs and the prior-year divestiture of the unprofitable Composites business.
- Quarterly results benefited from net favorable cumulative catch-up adjustments of $5.9 million, compared with $2.5 million in the prior-year quarter. The six-month benefit was $4.9 million versus $2.8 million.
- Government workforce subsidies were substantially lower: $2.4 million of second-quarter cost-of-sales benefit versus $18.1 million in the prior-year quarter; the six-month comparison was $2.8 million of foreign-government subsidies in 2021 versus $28.2 million of total subsidies in 2020.
- Net cash from operations declined primarily because the prior-year period included the $48.5 million CARES Act Payroll Support Program grant and higher inventory-related cash generation.
Outlook, risks, contingencies, and unusual items
- Management expects long-term strength in Aviation Services as commercial passenger traffic recovers and commercial and government aviation markets grow. Approximately $780 million of firm backlog remained at November 30, 2021; about 50% was expected to convert to revenue within 12 months.
- COVID-19, commercial flight volumes, public-policy decisions, government contract timing, geopolitical conditions, and economic conditions remain material risks. The U.S. withdrawal from Afghanistan ended AAR’s related activities, which generated approximately $67 million of fiscal 2021 revenue.
- AAR recognized a $1.3 million charge in the quarter to reduce the fair value of contingent consideration from the Composites sale to zero.
- Remaining reserves included $2.2 million for an early-terminated power-by-the-hour customer contract, $1.7 million for another loss-making PBH contract, and $4.6 million for minimum repair-volume guarantees.
- As of November 30, 2021, deferred payroll taxes totaled $12.4 million, with $6.2 million due by December 31, 2021 and the balance due by December 31, 2022.
- The company continued cooperating with government reviews concerning potential Foreign Corrupt Practices Act violations relating to Nepal and South Africa; the filing states that potential outcomes cannot currently be predicted.
- On December 16, 2021, the board authorized repurchases of up to $150 million of common stock, with management expecting to use the authorization over approximately two years.
Important facts for investors to verify
- Whether the commercial aviation recovery and MRO growth continue, particularly amid COVID-19-related traffic volatility.
- The sustainability of favorable cumulative catch-up adjustments and the absence of prior-year CARES Act subsidy benefits.
- Government contract timing, including the effect of reduced Afghanistan-related activity and C-40 engine-installation volumes.
- Operating cash conversion, working-capital requirements, and reliance on receivables sales, which totaled $158.4 million during the six months.
- Availability under the revolving credit facility, covenant compliance, interest-rate exposure, and the timing of deferred payroll-tax payments.
- Potential liabilities or enforcement actions related to the ongoing FCPA reviews and other government-contract matters.
- Execution of the $150 million repurchase authorization and its effect on liquidity and capital allocation.