AAR CORP. Form 10-Q Summary
Business context and reporting period
AAR CORP. reported results for the quarter and six months ended November 30, 2011, representing the second quarter and first six months of fiscal 2012. The company operates through Aviation Supply Chain, Government and Defense Services, Maintenance, Repair and Overhaul, and Structures and Systems segments.
Financial performance and position
| Metric | Q2 FY2012 | Q2 FY2011 | Six months FY2012 | Six months FY2011 |
|---|---|---|---|---|
| Sales | $475.9 million | $440.5 million | $955.2 million | $844.9 million |
| Operating income | $34.3 million | $35.3 million | $67.6 million | $64.1 million |
| Net income | $17.5 million | $16.8 million | $34.2 million | $30.5 million |
| Diluted EPS | $0.43 | $0.42 | $0.83 | $0.77 |
| Operating margin | 7.2% | 8.0% | 7.1% | 7.6% |
Six-month sales to commercial customers increased 24.1% and represented 50.7% of consolidated sales; government and defense sales increased 3.6% and represented 49.3%. Six-month gross profit was $152.0 million versus $143.7 million, but the gross margin declined to approximately 15.9% from 17.0%.
- Aviation Supply Chain sales increased 40.9% for the six months, aided by four aircraft sales and stronger parts demand.
- Government and Defense Services sales increased 10.9% for the six months, while margins declined modestly because of reduced aircraft availability in the airlift business.
- MRO sales increased 5.2% for the six months, with a slight margin improvement.
- Structures and Systems sales decreased 7.3% for the six months; gross profit declined 27.1% because of lower volume, product mix, program losses, and new-program start-up costs.
Cash flow, debt, and liquidity
- Six-month cash flow from operations was $4.8 million, down from $29.8 million, primarily because inventories increased $60.2 million and other program and overhaul costs used $59.2 million.
- Investing activities used $74.3 million, including $55.2 million of capital expenditures and $19.5 million for the Airinmar acquisition.
- Financing activities provided $39.5 million, primarily from increased borrowings, partly offset by dividends of $6.1 million, debt and lease repayments, and $3.7 million of share repurchases.
- Cash declined to $27.9 million at November 30, 2011 from $57.4 million at May 31, 2011. Working capital was $580.1 million.
- Recourse debt was $497.4 million and non-recourse debt was $6.5 million at November 30, 2011. Total debt increased from $437.2 million at May 31, 2011, excluding capital lease obligations.
- The unsecured revolving credit facility was increased to $580 million and had $150 million drawn, with $11.4 million of letters of credit reducing availability. A separate $65 million secured facility had $63.3 million outstanding.
Material changes, outlook, risks, and unusual items
- On October 11, 2011, AAR acquired Airinmar Holdings Limited for estimated consideration of $43.5 million, including a potential $20.3 million earn-out. The acquisition had negligible second-quarter earnings impact.
- On December 2, 2011, after the reporting date, AAR acquired Telair International GmbH and Nordisk Aviation Products for $280 million, initially funded through the revolving credit facility.
- Structures and Systems recorded $2.2 million of out-of-period expenses, primarily an inventory adjustment, including $0.9 million from fiscal 2011 and $1.2 million from the first quarter of fiscal 2012. Management stated the adjustment was not material to the related periods.
- The Amsterdam component repair facility remained classified as discontinued operations. AAR was evaluating strategic alternatives, including a sale, and reported an approximate carrying value of $14.3 million.
- Management cited global economic uncertainty, the European debt crisis, high oil prices, airline bankruptcies, and possible U.S. defense-budget reductions as risks to demand. No material changes to previously disclosed risk factors were reported.
- The company entered into an interest-rate swap and cap covering $50 million of revolving-debt exposure. The swap had a $3.1 million liability and the cap had a $0.7 million asset at November 30, 2011.
- The filing provides no specific numerical earnings or revenue guidance. Management reported that commercial aviation demand was recovering but continued to monitor economic, airline, and defense-budget conditions.
- Management concluded that disclosure controls were effective as of November 30, 2011, with no material changes to internal control over financial reporting.
Facts investors should verify
- Post-quarter funding and leverage impact of the $280 million Telair and Nordisk acquisition.
- Whether inventory growth and low operating cash conversion normalize as customer demand and program activity develop.
- Aircraft availability and margin trends in the Government and Defense Services segment.
- Resolution and financial impact of Structures and Systems program losses and the out-of-period inventory adjustment.
- Recoverability of inventories, aircraft and lease assets, A400M capitalized development costs of $86.0 million, and the Amsterdam facility’s $14.3 million carrying value.
- Potential earn-out obligations and subsequent earnings effects related to the Airinmar acquisition.
- Exposure to commercial airline weakness, high fuel prices, airline bankruptcies, and potential U.S. defense-spending reductions.