AAR CORP. Form 10-K Summary
Reporting period: Fiscal year ended May 31, 2011. The request metadata references “2010 Q4,” but the provided filing is the fiscal 2011 annual report, including fourth-quarter fiscal 2011 data.
Business Context
AAR provides aviation products and services to commercial aviation, government and defense customers worldwide. Its four reportable segments are Aviation Supply Chain, Government and Defense Services, Maintenance, Repair and Overhaul, and Structures and Systems. The company employed approximately 6,100 people and had approximately $963.1 million of firm backlog at May 31, 2011, of which approximately $716.9 million was expected to be fulfilled within 12 months.
- Government and defense sales were $942.4 million, or 53.1% of consolidated sales.
- Sales to the U.S. government, its agencies and contractors were $893.0 million, or 50.3% of consolidated sales.
- Airlift, acquired in April 2010, materially expanded Government and Defense Services revenue.
Financial Performance
| Metric | Fiscal 2011 | Fiscal 2010 | Change |
|---|---|---|---|
| Sales | $1,775.8 million | $1,316.4 million | +34.9% |
| Gross profit | $303.1 million | $240.4 million | +26.1% |
| Gross margin | 17.1% | 18.3% | Down approximately 120 bps |
| Operating income | $138.7 million | $93.8 million | +47.9% |
| Operating margin | 7.8% | 7.1% | Improved |
| Income from continuing operations | $73.1 million | $45.4 million | +61.0% |
| Net income attributable to AAR | $69.8 million | $44.6 million | +56.5% |
| Diluted EPS | $1.73 | $1.16 | +49.1% |
| Cash flow from operations | $108.6 million | $153.2 million | Down $44.6 million |
Fiscal 2011 diluted EPS from continuing operations was $1.81, compared with $1.21 in fiscal 2010. Discontinued operations generated a net loss of $3.3 million, versus a $2.2 million loss in fiscal 2010.
Segment Results
| Segment | Fiscal 2011 Sales | Fiscal 2011 Gross Profit | Key Change |
|---|---|---|---|
| Aviation Supply Chain | $435.8 million | $72.3 million | Sales increased 17.7%; margin declined to 16.6% from 18.2% |
| Government and Defense Services | $571.3 million | $105.5 million | Sales increased 193.1%, primarily from Airlift; margin declined to 18.5% from 21.7% |
| Maintenance, Repair and Overhaul | $393.7 million | $55.9 million | Sales increased 30.6%; margin improved to 14.2% from 12.7% |
| Structures and Systems | $375.0 million | $69.4 million | Sales declined 16.7%; margin declined to 18.5% from 20.6% |
Cash Flow, Liquidity and Debt
- Cash and cash equivalents were $57.4 million at May 31, 2011, compared with $79.4 million at May 31, 2010.
- Working capital was $498.0 million, compared with $521.6 million in the prior year.
- Investing activities used $118.7 million, including $124.9 million of capital expenditures, principally for aircraft and equipment supporting Government and Defense Services.
- Financing activities used $11.8 million, including $61.5 million of debt repayments, $3.0 million of dividends and $2.5 million of treasury-stock purchases, partly offset by $55.0 million of net short-term borrowing increases.
- Total recourse debt was $425.3 million, including $111.3 million of short-term recourse debt and $314.0 million of long-term recourse debt. Total non-recourse debt was $11.9 million.
- A new unsecured revolving credit facility provides borrowing capacity of $400.0 million, expandable to $450.0 million under specified conditions. At year-end, $100.0 million was drawn, approximately $10.5 million of letters of credit reduced availability, and approximately $289.5 million remained available.
- A separate secured revolving facility had $54.9 million outstanding against a $65.0 million commitment.
- Management stated that the company was in compliance with all financial covenants.
Material Changes Versus the Prior Comparable Period
- Sales growth reflected recovery in commercial aviation, higher airline maintenance activity and inventory replenishment, new commercial programs, Airlift revenue, and growth in defense logistics.
- Airlift contributed approximately $281.0 million of fiscal 2011 revenue, compared with approximately $29.8 million in fiscal 2010 because the acquisition occurred in April 2010.
- Government and defense sales increased 46.1% and became a majority of consolidated sales.
- Gross margin compressed because of product mix in Aviation Supply Chain and lower margins, transition costs and contract pricing adjustments in Government and Defense Services.
- MRO profitability improved with higher facility volumes, while Structures and Systems declined as two large mobility-product contracts reached completion.
- Fiscal 2011 included a $5.4 million pretax aircraft impairment charge and a $5.9 million pretax gain on the sale of a non-strategic MRO product line.
- The company decided to exit its Amsterdam component repair facility, which was classified as a discontinued operation. The unit had approximately $9.0 million of carrying value and fiscal 2011 revenue of $29.3 million.
- Capitalized A400M program development costs increased to $69.4 million, net of reimbursements, from $48.8 million.
Outlook, Risks and Unusual Items
- Management reported continued recovery in commercial aviation during fiscal 2011 but did not provide quantified fiscal 2012 revenue or earnings guidance in the provided text.
- A400M first shipments were delayed to fiscal 2013. The company expects more than $300 million of revenue through fiscal 2020 based on current Airbus projections, but further delays, cancellations or development problems could impair the $69.4 million of capitalized program costs.
- Most Airlift revenue depended on supplemental airlift services in Afghanistan. Planned U.S. troop withdrawals could reduce future demand.
- Government contracts are generally short-term, competitively bid and subject to funding, termination and renewal risk. Government and defense concentration increased the company’s exposure to budgetary changes.
- Ten 737-400 aircraft and one 737-300 in joint ventures, plus one wholly-owned MD80, were scheduled for lease renewal in fiscal 2012. Failure to re-lease or sell aircraft and engines at acceptable values could result in lower earnings or additional impairments.
- Aircraft, inventory and engine values depend on assumptions about lease rates, residual values, demand and future cash flows. Additional impairment charges remain possible.
- The company entered into a Department of State consent agreement concerning pre-acquisition export-control violations at Airlift. The agreement was scheduled to end in January 2012; noncompliance could have resulted in sanctions, including possible government-contract debarment.
- Fixed-price contracts expose the company to labor, material, fuel, overhead and execution cost overruns.
- The company faces commercial aviation cyclicality, airline bankruptcies, high fuel prices, tight credit, regulatory and licensing requirements, international operating risks, environmental liabilities, product liability claims and skilled-labor shortages.
- Fiscal 2011 benefited from a $2.3 million net tax benefit, including a $3.5 million benefit from completion of federal tax examinations for fiscal 2007 through fiscal 2009.
Important Facts for Investors to Verify
- Whether commercial aviation recovery and airline inventory replenishment continued after fiscal 2011.
- Fiscal 2012 performance and renewal outcomes for the aircraft leases scheduled to expire.
- The timing and economics of A400M shipments and recoverability of capitalized development costs.
- The effect of U.S. defense-budget changes and Afghanistan drawdown plans on Airlift and other government contracts.
- Compliance with debt covenants, refinancing requirements and scheduled convertible-debt put or maturity dates.
- Whether the $5.4 million aircraft impairment and discontinued Amsterdam operation indicate broader portfolio or restructuring risks.
- Future operating cash flow relative to elevated capital expenditures, purchase obligations and debt service.
- The filing’s audited financial statements and internal-control reports, both of which received unqualified opinions from KPMG LLP.