AAR CORP. Form 10-Q Summary
Business Context and Reporting Period
AAR CORP. operates through two segments: Aviation Services, which provides aviation parts, repair, maintenance, logistics, leasing and airlift services, and Technology Products, which manufactures aviation, defense and cargo-related products. This unaudited Form 10-Q covers the quarter and six months ended November 30, 2013, the second quarter of fiscal 2014.
Financial Performance and Position
| Metric | Three Months Ended Nov. 30, 2013 | Prior Year | Six Months Ended Nov. 30, 2013 | Prior Year |
|---|---|---|---|---|
| Sales | $540.7 million | $512.8 million | $1,055.2 million | $1,063.3 million |
| Operating income | $40.7 million | $37.8 million | $78.9 million | $76.2 million |
| Net income attributable to AAR | $20.0 million | $17.8 million | $37.9 million | $36.0 million |
| Diluted EPS | $0.50 | $0.44 | $0.95 | $0.89 |
| Operating margin | 7.5% | 7.4% | 7.5% | 7.2% |
- Second-quarter sales increased 5.4%, while six-month sales declined 0.8%. Second-quarter net income increased 12.4%; six-month net income increased 5.3%.
- Second-quarter Aviation Services sales rose 8.7% to $424.7 million, with gross profit of $71.3 million and a 16.8% gross margin. Technology Products sales declined 4.9% to $116.0 million, with gross profit of $19.7 million and a 17.0% gross margin.
- For the six months, Aviation Services sales increased 3.7% to $818.4 million and gross margin improved to 16.7% from 16.3%. Technology Products sales decreased 13.7% to $236.8 million and gross margin declined to 16.4% from 17.8%.
- Six-month operating cash flow was $66.3 million, compared with $60.3 million in the prior year. Investing activities used $13.5 million, primarily for capital expenditures, and financing activities used $30.3 million, primarily for debt reduction and dividends.
- Cash was $98.5 million at November 30, 2013, compared with $75.3 million at May 31, 2013. Working capital was $709.6 million.
- Total debt was $680.8 million, including $87.3 million of current maturities. Net outstanding borrowings were $582.3 million, down from $709.7 million at November 30, 2012.
- The company had a $475.0 million unsecured revolving credit facility, with $100.0 million drawn and approximately $14.8 million of letters of credit outstanding, leaving approximately $360.2 million available. Foreign credit lines provided an additional $5.4 million of availability.
- AAR was in compliance with all financing covenants at November 30, 2013. It expected to retire $68.4 million principal amount of convertible notes due March 1, 2014 using cash and revolver borrowings.
Material Changes Versus the Prior Comparable Period
- Quarterly growth was led by Aviation Services, including two aircraft deliveries to the U.S. Marshals Service, growth at the Lake Charles heavy-maintenance facility and increased parts-support activity.
- Aviation Services gross margin declined in the quarter because of product mix and Lake Charles start-up costs, partly offset by improved airlift fleet availability. For the six-month period, the segment margin improved.
- Technology Products weakened because of lower U.S. Department of Defense demand for mobility products and lower commercial cargo-container demand. The six-month decline reduced gross profit by $10.0 million.
- SG&A declined $5.3 million for the six months, reflecting lower intangible-amortization expense and cost-control measures. Quarterly SG&A was broadly stable.
- Debt decreased by $27.8 million from May 31, 2013, while cash increased by $23.2 million during the six months.
- The company completed the acquisition of PFW Aerospace cargo-system assets on December 16, 2013 for approximately $16.2 million in cash. The acquisition occurred after the reporting date.
Guidance, Outlook, Risks and Unusual Items
- Fiscal 2014 revenue guidance was reduced to $2.100 billion-$2.150 billion from $2.175 billion-$2.225 billion. Diluted EPS guidance was reduced to $1.95-$2.00 from $2.00-$2.05.
- The guidance reduction reflects fewer expected aircraft positions in the airlift business during the second half of fiscal 2014. Management expected airlift profit contribution to be lower in the second half than in the first half.
- The company expected 20 of 40 aircraft in revenue service at the beginning of fiscal 2014 to be de-scoped by year-end, with nine aircraft positions added, resulting in an expected 29 positions.
- Airlift exposure includes the planned reduction of U.S. military activity in Afghanistan. Two Afghanistan contract renewals had aggregate values of approximately $220 million through 2014, while several positions from an expired contract received only short-term extensions.
- A new $23 million U.S. Africa Command contract awarded December 2, 2013 was under protest, and a NATO-related IDIQ contract awarded December 3, 2013 had a maximum value of $134 million but no task orders had yet been received.
- The A400M cargo-system program had approximately $129.5 million of capitalized development costs and expected revenue of approximately $250 million through fiscal 2020 based on current projections. Recoverability depends on expected production costs, sales and deliveries.
- KC-10 program balances included $22.4 million of unbilled receivables and $11.9 million of costs in excess of billings. Recovery depends on future customer paperwork, billings and cost savings.
- Interest-rate and foreign-exchange risks remain. A hypothetical 10% U.S. dollar devaluation against foreign currencies would have reduced six-month pretax income by approximately $1 million. Interest-rate exposure was partly hedged with a swap and cap.
- The filing reports no material changes to the risk factors in the 2013 Form 10-K, no significant changes to critical accounting policies, and effective disclosure controls as of November 30, 2013.
Important Facts for Investors to Verify
- Whether reduced airlift aircraft positions and Afghanistan drawdown effects cause results to fall below the revised fiscal 2014 guidance.
- The timing and funding of the $68.4 million convertible-note repayment due March 1, 2014 and the resulting leverage and interest expense.
- Recovery of KC-10 unbilled receivables and costs in excess of billings.
- Recoverability of the $129.5 million in A400M capitalized development costs and achievement of projected program revenue.
- The outcome of the protest involving the $23 million Africa Command contract and the receipt of task orders under the $134 million IDIQ contract.
- Demand trends for commercial aftermarket parts and Technology Products mobility products, including the effect of defense-spending reductions.
- Execution, integration and financial impact of the PFW Aerospace asset acquisition completed after quarter-end.